Obama: $3 million retirement plan limit

Mitt Romney, who lost to President Obama in November, had an IRA worth at one point more than $100 million.

Mitt Romney, who lost to President Obama in November, had an IRA...

In his budget proposal released Wednesday, President Obama would limit the amount of money a person could accumulate in all tax-advantaged retirement plans combined - including regular and Roth individual retirement accounts, 401(k) and defined benefit plans - to about $3 million.

The limit would not apply to Obama's own pension, which is worth at least $5 million, because it is not in a tax-advantaged account, according to Brian Graff, executive director of the American Society of Pension Professionals & Actuaries. Obama's pension, which guarantees him a Cabinet-level salary for life indexed to inflation, is a "non-qualified deferred compensation plan, similar to what corporate executives get," he says.

The proposal would not cap those plans or prevent corporate executives from walking away with retirement packages worth tens or hundreds of millions of dollars. But some owners of small and midsize businesses might be discouraged from making further contributions to employee retirement plans when their own balances hit $3 million, says Graff.

Employers who offer qualified retirement plans, such as 401(k) plans, must meet nondiscrimination rules that prevent owners and top executives from getting pension benefits if their workers are not getting proportional benefits.

Obama is telling these employers, "Sorry, you have been playing by the rules. Too bad you have been investing successfully. You are out of luck," Graff says. "The reality is, a lot of employers will say, 'I'm not going to (contribute anymore).' "

The budget doesn't say what would happen to plan balances that already exceed $3 million.

The proposed rule would be difficult to enforce because individuals would have to figure out when all their pension plans combined exceed the limit, which would vary over time.

The budget says it would "limit an individual's total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013."

The limit is actually a moving target because the annuity amount ($205,000 today) would be indexed to inflation and the lump sump needed to finance that amount ($3 million today) would also change as interest rates change.

Few with big balances

The Employee Benefits Research Institute estimated that only 0.1 percent of people 60 or older who had at least one IRA or 401(k) had balances totaling $3 million or above at the end of 2011.

However, the institute estimates that almost 1 percent of all workers with a 401(k) balance in 2011 - and 1.2 percent of workers age 26 to 35 - would hit $3 million by age 65.

The institute did not include defined benefit accounts in its analysis. Their inclusion in the budget would change its results.

The proposal could benefit from outrage over Mitt Romney's IRA, which at one point was worth more than $100 million. Romney never explained how it got so large. Most people can't contribute more than $5,500 a year ($6,500 if 50 or older) into an IRA.

Romney, a former investment fund manager, could have contributed low-priced assets not available to the general public that later exploded in value.

A high-income self-employed person can put up to $51,000 a year to a Simplified Employee Pension, or SEP-IRA.

If the president wants to attack retirement-plan abuses without discouraging employer plans, he should only limit balances in IRAs (excluding IRAs funded by a rollover from a workplace plan), Graff says.

Savings incentive

The budget proposal would encourage savings by requiring employers with more than 10 workers who do not offer a retirement plan to enroll their employees in a direct-deposit IRA. Employees could opt out.

To defray setup costs, the proposal would give employers a tax credit of $25 per participating employee, up to $250 per year for six years. It also would double the credit employers can get for starting or running a new retirement plan - to $1,000 from $500 per year, for four years.

It also would exempt people with $75,000 or less in their traditional IRAs and 401(k) plans from taking required minimum distributions starting at age 70.5.

The California treasurer's office announced this week that Scholarshare, the state-sponsored 529 college savings plan, has just topped $5 billion in assets, up from $2.24 billion in January 2007. That sounds impressive, but 10 states, including New Hampshire, Nevada, Rhode Island, Maine and Utah, have even more assets in their plan or plans, according to Morningstar data.

How can smaller states have bigger plans?

Unlike many states, California offers no tax incentive to people who invest in its 529 plan, so "out-of-state plans market aggressively to California residents," says Morningstar's Laura Lutton.

Broker-sold plans

Some states, including Virginia, have plans that are managed by large financial companies that market and distribute them nationally through brokers and advisers.

"AllianceBernstein has a big broker-sold plan that launched from Rhode Island. Maine is large because Merrill Lynch runs it and sells it," says Joseph Hurley, founder of Savingforcollege.com.

"Fidelity, by contract, must feature New Hampshire's 529 plan as its nationally distributed direct-sold 529 plan," he adds. Nevada and Utah both have plans run by Vanguard, which is popular because of its low fees.

Mortgage relief

Checks will start going out Friday to about 4.2 million borrowers who were at any stage of the foreclosure process in 2009 or 2010 and had a mortgage serviced by one of 13 banks.

The banks agreed to pay a total of $3.6 billion to these borrowers to settle an investigation by federal regulators into alleged servicing abuses.

Borrowers did not have to prove they were harmed or even ask to have their cases reviewed, although those who did respond to a request for review will receive more than those who did not.

Eleven of the servicers will send payments between Friday and mid-July. They are Aurora, Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank and Wells Fargo. Information on payments from Goldman Sachs and Morgan Stanley will be announced later.

Payments will range from $300 to $125,000, but almost 80 percent of the checks coming from the 11 servicers will be $1,000 or less. Only 1,152 borrowers, mostly service members who lost their homes, will get the maximum payment.

Most borrowers will receive an envelope from Rust Consulting with a letter and check.